The outlook for oil prices is still the wildcard for the economic outlook across the Asian region, according to the latest market update from Indonesia's Mandiri Investasi.

Adding to the speculation is that central governments are trying to control the amount they spend on fuel subsidies, something made harder by the Indonesian Crude Oil Price that the archipelago nation has to pay being 15% above budget forecasts due to geopolitical tension in the Middle East.

Nonetheless, core inflation in Indonesia this year is down to 4.25%, almost half what it was two years ago notwithstanding it's expected to climb back to 5% by 2013, fuelled by growing economic activity especially in the consumer and property sector that has already lead to import growth slightly outstripping exports.

Mandiri does not, however, expect upward trending inflation to lead to an official interest rate rise although the market is pricing in an increase resulting in bond prices moving down aggressively, they noted.

Mandiri said concerns oil will break through the US$120 per barrel threshold requiring the government to increase its national fuel subsidy and lead to additional inflation is driving the bond price moves, which is in-turn attracting buyers particularly for government rather than corporate bonds and especially from retail investors.

Indonesian corporate bonds remain attractive with average yields of 8.3% based on IDX data, said Mandiri.

"We suggest investors overweight on corporate bonds due to the relatively low yields [of] government bonds in the secondary market [will force] the government [to] be overwhelmingly reliant on foreign investors and Bank Indonesia," they said.

Increasing activity in the Asian bond market, combined with some dampening in the outlook for selected resources, is seeing demand come off for AUD, noting that most Australian government bonds issued are bought by overseas investors and if the choices these buyers have in regional bond markets keep increasing then their unfetted demand for Aussie bonds and consequently the AUD will fall.

Reflecting this, some commentators are already forecasting the AUD to drop back to parity particularly if the carry trade picks reacts to the signals from the pressure the RBA is under to lower rates.

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